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Accepting Online Payments Part Two: How Do Payment Gateways Work and How to Choose One

By Adrian on April 30, 2010

Second part of a three part series – Accepting Online Payments: The Ultimate Guide . To check out the first, click here: Why you want to accept online payments. For the last part, click here: So Which Payment Gateway Should I Choose?

In the first post in this series, we covered some of the costs and benefits of online payment gateways. Now it’s time to dig deeper into how these things work. This post is a little longer than the first, but trust me: it’s worth it if you’re looking to learn.

How do payment gateways work?

You know those machines where you swipe your credit card in restaurants and retail stores? A payment gateway is kind of like one of those, just without the need for a card to be present to be charged. It is literally a gateway between you, your client, your client’s credit card provider and your bank.

The main job of the gateway is to validate your client’s credit card securely, make sure the funds are available, and get you paid.

Some gateways also require what’s called a merchant account. A merchant account is essentially just a special kind of bank account that handles your funds received via credit cards. If you have a storefront or a retail business, and are swiping people’s cards, then you already have a merchant account.

Even if you do already have a merchant account, there’s still one step you should take if you want to start accepting online transactions. You’ll need to give your bank a call and ask them to set you up for an Internet merchant account. This is different from a regular merchant account, because it gives you the ability to process credit cards without the card being physically present for the transaction.

If you do not have a merchant account or are not interested in getting one (it can take some jumping through hoops to get set up), PayPal can be a great way to start. PayPal functions a little like a merchant account add-on for your existing bank account. You can collect credit card payments in your PayPal account, then link it to a personal bank account (most people forget this step) to transfer the funds as necessary (note: not automatically – you have to specifically choose to transfer the funds).

If you would like to get a merchant account (a good idea if you’re processing a lot of transactions), then all the payment gateways will help you get one. The process does require some paperwork, however, and a few days (two to five) for them to run the appropriate credit checks.

What are the specific costs of an online payment gateway?

Discount Rate

The first thing you need to know about is discount rates. These rates (usually 2-6%) are commissions split by a few parties taken from your client’s payment. They are attributed to your merchant account provider and/or payment gateway and finally, the credit card provider. They will vary greatly depending on the payment gateway/ merchant account setup you choose but will be involved in any credit card transaction you ever make.

With some payment gateways, the discount rate will decrease as the your total monthly sales amount is increased through that gateway. For example, with Google Checkout. the discount rate a totally monthly sales of less than $3000 will be 2.9% but for over $10,000, it would decrease to 2.2%.

Almost all payment gateways that require a merchant account charge a monthly fee. The more services and functions your gateway offers  (or you choose), the higher these fees will be.

It’s worth noting that some of these fees are optional, and if you integrate with an application to handle your e-commerce, you may not need some options. For example, some payment gateways will add an extra charge if you want to use their service to enable auto-billing (the ability to process regular, pre-authorized payments on a client’s credit card).  If you set up auto-billing in FreshBooks, you don’t need to pay anything extra to your payment gateway.

One common value-added feature you might want to consider is a fraud detection toolbox. With most payment gateways, you are given a number of tools to help you guard against fraud, such as filters to define the scope of people or places you receive payments from. As an example, Authorize.Net offers their Advanced Fraud Detection Suite. It’s a good idea to add this service if you will be accepting payments from people who you do not have an existing relationship with (ie people who sign up on your website, as opposed having been a client for 10 years) because it will help reduce chargebacks .

Per Transaction Fees

Lastly, for each transaction you process, most payment gateways charge a flat fee. It’s usually under fifty cents per transaction, but I’m afraid this fee is pretty much unavoidable.

When you sign up for a payment gateway, there is also usually a setup fee. Sometimes, it’s free (like PayPal Standard), but most of the time the setup fee ranges from $49 – $250. The good news = at least the setup fee is only a one-time charge, and I am positive you will quickly earn it back.

Laid out like this all in one list, the costs may seem surprising. But when you factor the costs into enhanced convenience for your customers and dramatically improved cashflow, as well as the time your will save collecting from your customers (no checks in the mail, or records to update because FreshBooks will do that automatically), it is well worth it.

What criteria should I consider when choosing an online payment gateway?

When choosing an online payment gateway, you will need to consider a number of different factors. I’ve walked through some of the key points below, but I want to stress that you shouldn’t get overwhelmed by all this. Pick a gateway you will think will work, and get back to growing your business. Or give us a call if you get stuck: 1 866 303 6061. We’d be happy to help you make your decision.

1. How many transactions do you expect to process per month?

If you expect a relatively low volume of online payments, then you will want to avoid monthly fees

and a high setup cost, as it might be tough to recover the investment.

Simple gateways like PayPal, or Google Checkout are your best options. They are quick and easy to use, free to setup, and do not require a merchant account. With PayPal, you can always upgrade to one of their more advanced options later, if needed (more info in the next post).

If you think you’re going to be processing north of 15 transactions a month, then I would suggest checking out something like Authorize.Net or one of PayPal’s premium services, such as PayPal PayFlow Pro. These options set the standard for online payment gateways and can be integrated into pretty much anything (including eCommerce solutions, billing solutions, and online shopping carts). They do have a monthly fee and higher setup cost, but you’ll make the money back in no time.

2. Do you plan to do auto-billing?

If you want a system that will store your clients’ credit card numbers and let you charge them on a recurring basis using FreshBooks, then you will need an online payment gateway with auto-billing capabilities. Many gateways now have this feature, but in almost all cases they also require your business to have an online merchant account. PayPal Standard, Google Checkout and some others are unable to handle this kind of pre-authorized transaction, as the table below shows:

*FreshBooks integrates with all these payment gateways, but can only offer automated recurring charges to credit cards with the gateways that have a green checkbox

3. Where are you based?

Some payment gateways are a little less international than others. Some will only accept US dollars and work with US-based companies, while others will offer a few more countries.

Payment gateways like or PayPal offer a lot more currencies than most payment gateways, and can also provide an interface with multiple languages.

Also, certain gateways will only work with merchant accounts from certain countries (details in the next post).

Another factor you want to consider is the payment gateway’s reputation in the marketplace. When evaluating any web service, why not give them a quick “Google ”. You will quickly get an idea of what kind of reviews they are getting. Also, if you want to get some customer testimonials, do a search on Twitter .  With any larger service, you will likely see mixed reviews, but what you want to check is how much it is used and get a sense of its overall reputation. For example, look at the amount of search results to get a very rough idea of the general usage of a payment gateway.

5. Level of Support

What happens when something goes wrong? Is there someone you can call (or at least email)? With anything that interacts with your clients, you want to make sure it is always working. If something does go wrong, you need to know you can call on someone who’ll be able to fix things fast. A good place to start is just contacting them to see how the initial experience goes and, again, doing a little online research into other customers’ experiences.

6. Integrations and Add-ons

The final thing you’ll want to consider is whether the payment gateway can be used with integrations and add-ons that you are currently using, or plan to use. For example, shopping carts, eCommerce, point-of-sales (POS) and billing solutions. Does it integrate with the current payment solutions you are using? Do you plan to grow your company in more directions?

As an example, some payment gateway solutions also provide physical POS systems if you have a storefront. That might be useful to you if you’re looking at setting up a physical store.  But if you only have an online business, and never have an intention to go bricks-and-mortar store, then just an online solution will suffice (usually cheaper).

In Conclusion:

Lastly, you can research all the payment gateways in the world, but this is business: accept that making a decision is better than holding off until you’re absolutely sure you have perfect information. Do not fall into paralysis by analysis – keep building your business instead and move on.

In the next blog post…

In the third post in this series, I’ll give you a background on each of the specific payment gateways that FreshBooks works with.

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I completely agree. Freshbooks system is great and no complaints, apart from the payment gateway options as I have only heard of paypal (which is very expensive in fees), and being in the uk it is very important for our customers to have heard of the company to which they are paying. Freshbooks please integrate Sagepay as this i pretty much the biggest payment gateway in the UK and is very trusted. As it stands I am not using online pavements as I need a UK company for this. Please help


Hiya Mark

I agree that your options for Payment Gateways in the UK are more limited, but on the brighter side, there have been some additions in the last few years since Phil’s post (insert sigh of relief).

There are a couple more Payment Gateway options for you take a look at at the following FAQ post ( ). If you happen to not see anything that tickles your fancy, you can request a Payment Gateway at the following link ( ). Just click on “Request an Add-on” on the right side of the page.

If none of the stuff above works for you, just drop me a line at – I’m here to help John Coates

Phil – Thanks for the comment. We know that we don’t cover every possible card right now – it’s tough to support all of the many different preferences everywhere around the world, so we cover the most popular and obvious choices first and work to support others as we can.

One option you could consider would be to look at PayPal Standard or to accept more credit cards with FreshBooks. It is very common to offer different gateways for clients that prefer to use a different card. PayPal standard is quite universal. Let us know if that helps.

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